Modeling and Forecasting Natural Gas Prices

Abstract In this project we will model and forecast the natural gas prices over the short-term through the development of the Error Correction Model (ECM). This is presented as the best predictive model among various alternatives. To build this model, we gathered the oil prices to analyze the impact of the changes in these prices on the changes in natural gas prices. The results of the forecasting exercise, carried out using the US Natural Gas 3 Months Strips series, suggest that the forecasting approach can be used to obtain a performance measure for the price. Key words: ARMA; ECM; Cointegration; Forecasting; Natural Gas Prices; Oil Prices. JEL Classification: G17

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Natural Gas
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Natural gas is classified as a fossils fuel and is abundant in most parts of the world. It is referred to as ‘natural gas’ because it occurs naturally as a hydrocarbon that is an element from carbon and hydrogen atoms. It consists mainly of methane and is colorless. It is known to be the simplest type of hydrocarbon (Originenergy.com.au, 2015). Natural gas is a very efficient energy source apart from being environmental friendly. It is known to be the cleanest-burning conventional fuel because it emits smaller amounts of greenhouse gases as compared to the heavier hydrocarbon fuels like coal. The primary compositions of natural gas are methane (CH4), ethane and propane. Natural gas is mainly used to fuel electric power generators, the raw material for making consumer products from plastics and heats buildings. This paper explores the advantages and problems associated with extraction, processing, transportation and use of natural gas.
Advantages of natural gas
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